Becoming Strategic: Endogenous Consumer Time Preferences and Multiperiod Pricing

AbstractShould Consumers Be Strategic?Strategic consumer behavior under multiperiod pricing—when consumers anticipate future price changes and, potentially, delay a purchase to get a product at a lower price—is a phenomenon that has received significant recent research attention in the operations and revenue management literatures. In “Becoming Strategic: Endogenous Consumer Time Preferences and Multiperiod Pricing,” Aflaki, Feldman, and Swinney examine this problem from a different angle: They ask whether being strategic actually benefits consumers, whether consumers are willing to exert costly effort to become strategic, and how the answers to these questions impact the optimal decisions of firms pricing over multiple periods. They find that much of the conventional wisdom regarding strategic consumer behavior is upended when the decision of consumers to become strategic in the first place is considered, including qualitative features of the firm’s optimal pricing policy and, possibly, the firm’s preference between dynamic and committed pricing strategies.Pricing over multiple periods under forward-looking, strategic consumer purchasing behavior has received significant recent research attention; however, whether consumers actually benefit from this behavior and would voluntarily choose to be strategic has not been previously considered. We explore this question by developing a model of endogenous time preferences, consistent with microeconomic theories of boundedly rational intertemporal decision making, in which consumers choose to become strategic by exerting costly effort. We show three key implications of this choice. First, considering the consumer choice to be strategic can have a significant impact on firm and consumer decisions—in particular, qualitatively impacting the firm’s optimal pricing policy. Second, it is possible to increase firm profit, consumer surplus, and social welfare simultaneously by increasing the cost of strategic behavior, suggesting that firms can, essentially, force consumers to be myopic and make all parties better off; this helps explain how firms that do the most to make strategic behavior difficult are able to attract more demand and be successful in the marketplace. And third, efforts to mitigate strategic consumer waiting by committing to future prices instead of pricing dynamically may decrease the cost of strategic behavior and backfire, encouraging more consumers to be strategic; hence, in contrast to most previous research, price commitment may yield lower profit than dynamic pricing if consumers can choose to be strategic.